Regulation (EU) 2023/2631: Harmonized Framework for Green Bonds

Chronology (Background)

• July 8, 2021: The European Central Bank (ECB) adopted a climate roadmap, incorporating climate change considerations into its monetary policy.
• November 22, 2023: The European Parliament and the Council approved Regulation (EU) 2023/2631 on European Green Bonds and optional information disclosure.
• November 30, 2023: Publication of Regulation (EU) 2023/2631 in the Official Journal of the European Union (OJEU).
• December 21, 2024: Deadline for Member States to notify the Commission and the ESMA (European Securities and Markets Authority) of relevant criminal law rules that already sanction infringements contemplated in the regulation. As of this date, Member States, in accordance with their national law, shall ensure that competent authorities are empowered to impose administrative penalties and take other appropriate administrative measures, which shall be effective, proportionate, and dissuasive.
• December 21, 2024 – June 21, 2026: Transitional period for external verifiers wishing to provide services under the regulation, requiring notification to the ESMA and compliance with certain articles.
• June 21, 2026: End of the transitional period for external verifiers of European Green Bonds.

What is the primary objective of Regulation (EU) 2023/2631 on European Green Bonds?

The primary objective of the Regulation is to establish a standard for bonds marketed as green bonds in the European Union, addressing market fragmentation and the risk of greenwashing. It does so by setting uniform requirements for issuers wishing to use the designation “European green bond” or “EuGB,” creating a registration and supervision system for external verifiers, and providing information disclosure templates for bonds marketed as sustainable.

What are “European Green Bonds” (EuGB), and what requirements must issuers meet to use this designation?

European Green Bonds (EuGB) are bonds whose proceeds are allocated to projects that comply with the environmental sustainability criteria set out in Regulation (EU) 2020/852 (the EU Taxonomy). To use the EuGB designation, issuers must:

• Fully allocate the bond proceeds to economic activities that align with the EU Taxonomy before the bond’s maturity.
• This involves allocating proceeds to fixed assets, capital expenditures, operating expenses, or financial assets related to economic activities that meet the taxonomy’s requirements.
• Obtain pre-issuance verification from a registered external verifier confirming that the bond complies with the Regulation’s requirements.
• Publish a prospectus in accordance with Regulation (EU) 2017/1129, designating the bonds as “European green bond” or “EuGB.”
• Publish an allocation report and an impact report after issuance.
• Obtain post-issuance verification from an external verifier regarding the allocation of proceeds and the bond’s environmental impact.

How does the regulation define “environmental sustainability,” and how does it relate to the EU Taxonomy?

The regulation relies on Regulation (EU) 2020/852 (EU Taxonomy) to define environmental sustainability. This means that activities financed by EuGBs must substantially contribute to one or more of the environmental objectives defined in the Taxonomy (climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems), not significantly harm other objectives, and comply with minimum social safeguards.

What are the taxonomy requirements?

The “taxonomy requirements” are the criteria for determining whether an economic activity can be considered environmentally sustainable, as established in Regulation (EU) 2020/852. They are important because the proceeds of EuGBs must be allocated to activities that meet these criteria, ensuring their real contribution to environmental objectives.

What is the role of “external verifiers” in the context of European Green Bonds, and how are they regulated?

External verifiers play a crucial role in assessing compliance with the Regulation’s requirements. They must register with the European Securities and Markets Authority (ESMA) and comply with standards of organization, business conduct, conflict of interest management, and professional competence. They conduct pre-issuance verifications to validate the sustainability of the financed project and post-issuance verifications to confirm the allocation of proceeds and the actual environmental impact. The regulation requires them to issue an independent opinion on whether the issuer has complied with the taxonomy requirements and to verify the existence of adequate due diligence processes and systems.

What flexibilities exist in the Regulation regarding economic activities financed by EuGBs that do not yet fully meet the technical screening criteria of the Taxonomy?

The Regulation allows some flexibility, specifically for economic activities for which technical screening criteria do not yet exist under Regulation (EU) 2020/852, or for international support activities that contribute to the environmental objectives of said Regulation. In these cases, the issuer must demonstrate that the activity substantially contributes to an environmental objective, does not significantly harm other objectives, and is carried out in accordance with minimum safeguards. This flexibility is limited in scope and scale. Additionally, for capital and operating expenses related to economic activities that will meet the taxonomy requirements, the issuer must publish a CapEx plan specifying a timeline for achieving compliance with the taxonomy.

How does the Regulation address the risks of “greenwashing” in the green bond market?

The Regulation addresses the risk of greenwashing through:

• Clear and mandatory criteria: Establishing precise criteria for the “European green bond” designation, linked to the EU Taxonomy.
• Mandatory external verification: Requiring verification both before and after issuance by registered and supervised verifiers.
• Transparency and disclosure: Mandating the publication of an information sheet, a prospectus, an allocation report, and an impact report.
• Supervision and sanctions: Competent authorities and the ESMA supervise compliance and can impose sanctions in case of infringements.

What specific provisions apply to European Green Bonds issued through securitizations?

For securitized bonds designated as “European green bond” or “EuGB,” references to the “issuer” in the Regulation generally refer to the “originator” (the entity using the proceeds). However, references in articles related to supervision, sanctions, and prospectuses apply to both the originator and the Special Purpose Entity (SPE). The Regulation imposes specific disclosure and exclusion requirements on securitized bonds, avoiding exposures that finance fossil fuel exploration, extraction, or production. Transparency is required regarding the eligibility and compliance with the taxonomy of the activities financed by the securitized exposures.

How is the Regulation supervised and enforced, and what sanctions can be imposed for non-compliance?

The supervision of compliance is the responsibility of the competent authorities of the Member States and the ESMA. The ESMA supervises external verifiers and can conduct investigations and apply sanctions. Competent authorities supervise issuers of European green bonds and can exercise supervisory powers, such as requiring the publication of verifications and assessments, suspending or prohibiting offers, and making non-compliance public. Administrative sanctions may include fines of up to 500,000 EUR for legal entities or 0.5% of total turnover, and up to 50,000 EUR for natural persons. Member States may establish additional criminal sanctions. The ESMA can impose coercive fines to enforce compliance.

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